1.3. 10 Methods to reduce the foreign exchange risk

The degree of currency risk can be reduced by using two methods:

  - The right choice of currency rates;

  - Regulation of foreign exchange exposure on contracts.

The method of choosing the correct currency rates

Foreign economic contract is to establish prices in the contract for that currency, changes in exchange rate which is beneficial for the organization. For exporter, such currency will be "strong" currency, ie a course that rises during the term of the contract. For the benefit of importer "weak" currency whose rate decreases. It should, however, bear in mind that the forecast of exchange rates in the best case possible with a probability of 70%. In addition, when a contract is not always possible to choose the currency, as the partners' interests in this matter may be opposed, and therefore, choosing a favorable currency will have to give way at any other point of the contract (price, credit, collateral, etc. .), and it is not always possible and profitable.

The method of regulating the currency position on foreign trade contracts concluded can be used by business entities concludes a large number of foreign trade transactions with partners from different countries. The content of this method is to balance the structure of monetary assets and liabilities under contracts that can be achieved in two ways:

- while simultaneously signing contracts for the export and import should be such that these contracts were in one currency and payment terms are roughly the same, in this case, the losses arising from changes in exchange rates on export profits offset by imports, and vice versa.

- If the entity is specialized on just one form of foreign economic activity, it is advisable to diversify the currency composition, ie contracts with different currencies, with the trend towards the opposite changes in currency.

1.3.11 Methods of insurance from foreign currency risks

Two methods of insurance against currency risk:

- Currency clause;

- Forward transactions.

Currency clause is specifically included in the text of the contract condition, according to which the amount of the payment should be reviewed in the same proportion that will change the course of the payment currency relative to the currency clause.

Currency clause linked the size of payments due to changes in currency and commodity markets. This is the most common method of insurance against currency risks.

       Currency clauses are: indirect, direct, multi-currency.

       Indirect exchange clause applies in cases where the price of goods is fixed in one of the most common in international transactions of currencies (U.S. Dollar, Japanese Yen, etc.), and provides for payment in another currency unit, usually the national currency.

The text of a clause may be similar to the following: "The price in U.S. dollars, payment in Japanese yen. If the dollar to yen before the day of payment will change compared to rate on the day of conclusion of the contract, the price of goods is changed accordingly, and the amount of the payment."

Direct exchange clause applies when the payment currency is the same, but the value of payment amount due in the contract is contingent upon changes in the exchange rate of payments in relation to other, more stable currency, the so-called currency clause. Direct exchange clause is aimed at preserving the purchasing power of the currency at the same level.

The formulation of such a clause may be similar to the following: "Product price and payment in U.S. dollars. "If exchange rate on the payment date to the Japanese yen in the foreign exchange market in New York will lower its rate on the day of conclusion the contract, the price of goods and the amount of the payment in U.S. dollars, respectively, are increased."

Multicurrency clause - is a reservation the effect of which is based on the correction of the amount of payment in proportion to the rate of the currency of payment, but not to one but to a specially selected set of currencies (currency basket), the course of which they are calculated as the average value for a particular technique. For example, on the basis of the arithmetic average percent deviation rate of each currency "basket" of the initial level or on the basis of the arithmetic average of the calculated change in the agreed rate of currencies.

       The essence of forward transactions for insurance exchange risk is as follows. Forward exchange transaction - the sale or purchase of a certain amount of currency at an interval of time between the conclusion and execution of the transaction on the exchange rate of the day of the transaction. In this case, the forward exchange rate is calculated based on the spot rate plus the net gains or net losses on interest:

• Currency bought on spot and lay on the deposit before maturity;

• Currency sold on spot and laid on deposit counterparty to the transaction before maturity.

            Net gains or net losses are expressed through the "pips" and, accordingly, are added to or deducted from the spot rate.

In the case of forward transactions exporter, at the signing of the contract about learning schedule payments received, concludes a deal with your bank, ceding to him the amount of future payments in foreign currency at a predetermined exchange rate. Export advantage is that it defines revenue in national currency to receive a payment based on that sets the price of the contract. Bank, to enter into forward transaction shall deliver to the date stipulated in the contract, the equivalent national currency at a predetermined rate, regardless of the actual market exchange rate of the national currency against the currency on that date. The company is committed to provide foreign currency earnings to the bank or to provide instruction to transfer currency abroad (depending on membership of the exporting or importing party).

       Importer contrast, in advance of buying a bank with foreign currency forward transaction, if the expected appreciation of the currency of payment fixed in the contract.

      Similarly, the foreign investor can hedge the risk associated with a possible depreciation of the currency - the investment by selling it to the bank for a certain period in order to protect their assets against loss.

      Thus, the customer has insured its risks. The risk assumed. With that point on risk to hedge for the bank itself. Therefore, the bank, usually on the same day for the same amount and in the same currency makes another forward deal with another bank or a futures contract on a specialized market.

       And, of course, to limit the currency risk exposures are hedged